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Federal Income Tax
Widener Law Commonwealth
Hussey, Michael J.

Federal Income Tax Outline
Spring 2009

I. Chapter 1 – Tax Basics

a. The 16th Amendment allows the government to impose income taxes
b. Primary Authority
i. IRS Code
ii. Treasury Regulations
1. Interpretive
2. Legislative – Congress specifically requests regulations to carry out specific Code sections (§ 409A(3))
iii. Revenue Rulings
1. Advice issued by the treasury intended for all taxpayers to rely upon
2. Creates fact patterns of common tax situations and corresponding issues
iv. Revenue Procedures
1. Administrative in nature
2. Provides guidance regarding bureaucratic procedure
v. Taxpayer-specific Advice
1. Private Letter Rulings (only good for the taxpayer to whom they are issued)
2. Technical Advice Memorandum
3. Field Service Advice
c. Process
i. Taxpayer files return with the appropriate service center
ii. Examination
1. Audit stage – try to resolve matter with an IRS agent
2. If you can’t, you have 30 days to appeal the agent’s decision
iii. Appeals Division
iv. Go to Court
1. Taxpayer has 90 days after the final decision to go to court
a. Tax Court
i. Don’t need to pay deficiency before filing here
ii. Notice Pleading
iii. Court has expertise in tax matters
b. District Court
i. Pay tax first and seek a refund
ii. Might be more sympathetic to the taxpayer because the court is local
c. Claims Court
i. Pay tax first and seek a refund
d. Court of Appeals
e. Supreme Court
d. Tax Liability Discussion
i. Gross Income
1. IRC § 61 – “all income from whatever source derived, including, but not limited to, a list of fifteen different items.
2. Includes income realized in any form whether in money, property, or services. Reg. § 1.61-2 (d) (1)
3. Assignment of Income Doctrine
a. Prevents income shifting
b. Prevents tax payers in high tax brackets from constantly shifting their income to related taxpayers in a lower bracket
4. Individuals use the “cash method”
a. Only includes income that has been actually or constructively received
b. Stock value only taxable when it is “realized”
ii. Adjusted Gross Income
1. IRC § 62 – Gross income less certain deductions
a. Above-the-line: deductions the taxpayer takes in determining his adjusted gross income
b. Below-the-line: deductions a taxpayer may take into account only after the adjusted gross income has been determined
c. In lieu of itemizing personal deductions, taxpayers have the right to elect a standard deduction
i. Regardless of the amount of a taxpayer’s potential deductions, if the taxpayer elects to use the standard deduction, he uses the congressionally-mandated figure
iii. Deductions
1. Begins with § 161
2. Every time you have an expense that you believe is deductible, you must find a specific code section authorizing the deduction
3. IRC § 162 – Personal expenses are not deductible
a. This includes commuting expenses
4. IRC § 212 – Expenses for the production of income are deductible
5. Mortgages
a. IRC § 163 (a) – Interest payments are deductible as “qualified residence interest”
6. IRC § 164 – Certain local and state taxes are deductible
7. IRC § 170 – Charitable contributions are deductible to the extent they do not exceed the taxpayer’s “contribution base”
iv. Tax Rates
1. Rate Structures
a. Progressive – You pay a higher percentage as your income increases (we have this system)
b. Proportional – same proportional rate paid regardless of income (sales tax)
c. Regressive – Rates go down as income level goes up
2. Alternative Minimum Tax (AMT)
a. Not adjusted for inflation
3. Marginal Rate – rate at which the last dollar is taxed
4. Effective Rate – Overall rate
a. Tax paid divided by the total taxable income (marginal rate)
5. Credits
a. Dollar-for-dollar
i. Offsets tax liability – Prefer these over deductions
b. Most are non-refundable
i. Earned Income Credit (EIC) is refundable

II. Chapter 2 – Gross Income

a. IRC § 61 – broad definition:
i. All income from whatever source derived
b. An undeniable accession to wealth, clearly realized, and over which the taxpayer has complete dominion. Glenshaw Glass Co.
i. Elements
1. Accession to Wealth
2. Complete Control
3. Clearly Realized
a. Need to have triggering event – “realization event”
c. IRC § 108 (a) – Income from discharge of indebtedness
i. Gross income does not include any amount which would be includible in gross income by reason of the discharge of indebtedness of the taxpayer if –
1. The discharge occurs in a title 11 case,
2. The discharge occurs when the taxpayer is insolvent
d. Treasure Trove – Reg. § 1.61-14 (Cesarini)
i. Constitutes gross income
ii. Should be included in the taxable year in which it is reduced to “undisputed possession”
iii. Finding $10 in the parking lot is Treasure Trove
e. IRC § 102 – Gifts, bequests, devises, and inheritances are NOT included in calculating gross income
f. Income realized in any form:
i. Frequent flyer miles accumulated as a result of business travel paid by the taxpayer’s employer does NOT constitute gross income
ii. Does include 3rd-party payment of taxpayer’s legal obligation
1. Employer paying employees personal income taxes (Old Colony Trust)
g. Bartering
i. Exchange of property/services for other property/services, without actually paying in cash for either one
1. Both parties have income as to property or services received that is taxed
2. The fair market value of the prop

Karns – Not a loan because Karns controls whether or not it has an obligation to repay

IV. Chapter 4 – Gains Derived from Dealings in Property

a. IRC § 61(a)(3)
i. Gains derived from dealings in property are included in gross income
b. IRC § 1001(a)
i. When you sell property for more than you paid, you have realized a gain
1. Sale is the realization event
2. Basis à the amount you paid for the property
3. Amount Realized à the price at which you sold the property
4. Gain à Amount realized (minus) Basis
a. Ex: You paid $1M for Greenacre
b. You sold Greenacre for $750K
c. You realized a negative gain (or loss) of $250K
5. Loss à Adjusted Basis (minus) Amount Realized
c. IRC § 1001(b)
i. Amount Realized is the sum of any money plus the FMV of any property received
1. Ex: Sale of Greenacre for $3M
a. $2.5M in cash
b. $500K diamond ring
c. Amount Realized is $3M
d. IRC § 1012
i. Basis is the amount you paid for the property
1. Does not include :
a. Real property taxes
b. Dividends
ii. Equitable apportionment Reg. § 1.61-6(b)
1. Applied when subdividing a larger parcel of property
2. Gain or loss shall be determined at the time of sale of ach part and not deferred until the entire property has been sold
e. IRC § 1016
i. Adjusted basis reflects the impact events occurring subsequent to one’s acquisition of property may have on the amount of one’s investment in the property
1. For expenses incurred by improving the property (capital expenditures), you can increase the basis
2. Decrease basis for depreciation

f. Impact of Liabilities
i. Two types
1. Recourse – allows the lender to recover full value of loan, regardless if your property is repossessed
a. No special tax consequence if your lender is also your seller
2. Non-recourse – debtor not personally liable for the difference of debt and FMV of the property if the property is repossessed
ii. Amount of load is included in your basis (Commissioner v. Tuft)
1. Can’t increase basis when you make payments on your loan
iii. Effect of liabilities on amount realized
1. Amount of recourse liability assumed by purchaser is included in the seller’s amount realized